US Congress bails out Canadians’ RRSPs. [Yeah, sure…]
No one loses money because of what they know: what hurts them is what they don’t know. Doesn’t this seem like a perfectly logical statement?
This is the sequence of events that illustrates what you and the experts don’t know:
Summer 2007. The stock market sold off sharply from mid July to mid August. The news related to the U.S. subprime mortgage fiasco and the downturn is U.S. home prices.
January 2008. The stock market sold off sharply as we learned that the problem was much worse than we had thought. Many non-U.S. banks were holding billions of dollars of investments backed by worthless morgages.
March 2008. The stock market sold off sharply again. The mortgage/real estate problem was so bad that a major brokerage firm had failed.
July 2008. The stock market sold off sharply again. The situation was worse than they thought: two huge U.S. mortgage corporations had failed and needed the government to bail them out.
September 2008. The stock market sold off sharply again. The problem is so bad that one more giant brokerage firm failed and another had to be bought out. And now the U.S. government is contemplating backing hundreds of billions of dollars of these junk-mortgage-backed investments.
Do you see the pattern? It’s not about what they know, it’s about what they don’t know. And every time the experts learn more about the unknown numbers in this mysterious mortgage-monster problem, the stock market goes lower.
Our assumption was that we only lose where we don’t know. But it’s not true, is it?
We DO know that the US junk-mortgage problem is worse than they thought. We DO know that US house prices are in a tail spin. We DO know that the stock market has gone lower and lower every time some new financial crisis surfaces. Yet, in the face of all these “knowns,” we continue to hold onto our stock portfolios. And we continue to lose. Why is this?
The reason most investors and their advisors continue to hold on to their losing positions is not logical, it’s emotional. It’s financial shell shock.
Our expectation is that our investments should go up in value: but this past year has not delivered on our expectation. And now, investors and their advisors are in shock, frozen in inaction. In full knowledge that the U.S. government is required to bail out the U.S. financial system, they remain frozen. And every month it’s getting worse. Fear and dissapointment have replaced logic.
How can we protect ourselves from further loss? We simply sell our stocks. We stop relying on the U.S. government to bail us out: we bail ourselves out. Then we can stay frozen in disbelief without losing any more money in our RRSPs.
Thursday, September 25, 2008
Wednesday, September 17, 2008
September selloff ended today [Sept16,08]
September Selloff Ends
For now, it looks like the selling is over, having ended between 2 and 3 o’clock today.
The key occurance was the final flushing of finacial stocks out of the large pension plans and mutual funds. These mega-investors found themselves in an awkward position last year at this time. The summer 2007 selloff came with a warning about subprime mortgage woes: but the mega investors were seriously over invested in bank stocks and mortgages. Their systematic selling program began.
And, this afternoon, those selling programs were mostly completed. The next few days should give us the final verdict: can the stock market move up from here?
Here is an observation on both the Canadian and US markets:
The Facts: The financial news in September was even worse than in July. In July, we were worried that Fannie and Freddie were in trouble. In September they actually had to be bailed out. In July we were worried that Lehman and Merrill were in trouble. In September, one was bought out and the other went under.
The Emotions: In September, investors were more worried than they were in July. Would the US financial system hold up?
The Prices: The financial stock indices held well above their July lows even though Lehman Bros. went bankrupt. In spite of the extra bad news in September, the financial stock indices did not sell off to new lows. And, today, the selling abated and the buying came back. The crisis appears to be over.
There is a divergence between investor emotion and price. That’s what happens at the bottom.
Caveate emptor: this argument is the logic that tells us a short term stock market bottom occurred today: but, in the financial world, anything can happen. Good luck.
For now, it looks like the selling is over, having ended between 2 and 3 o’clock today.
The key occurance was the final flushing of finacial stocks out of the large pension plans and mutual funds. These mega-investors found themselves in an awkward position last year at this time. The summer 2007 selloff came with a warning about subprime mortgage woes: but the mega investors were seriously over invested in bank stocks and mortgages. Their systematic selling program began.
And, this afternoon, those selling programs were mostly completed. The next few days should give us the final verdict: can the stock market move up from here?
Here is an observation on both the Canadian and US markets:
The Facts: The financial news in September was even worse than in July. In July, we were worried that Fannie and Freddie were in trouble. In September they actually had to be bailed out. In July we were worried that Lehman and Merrill were in trouble. In September, one was bought out and the other went under.
The Emotions: In September, investors were more worried than they were in July. Would the US financial system hold up?
The Prices: The financial stock indices held well above their July lows even though Lehman Bros. went bankrupt. In spite of the extra bad news in September, the financial stock indices did not sell off to new lows. And, today, the selling abated and the buying came back. The crisis appears to be over.
There is a divergence between investor emotion and price. That’s what happens at the bottom.
Caveate emptor: this argument is the logic that tells us a short term stock market bottom occurred today: but, in the financial world, anything can happen. Good luck.
Investing by "feel."
“Feeling” your way in investing. September15, 2008
When you woke up this morning and realized that two of America’s biggest brokerage firms were in serious trouble, two of her biggest mortgae companies had to be bailed out last week and foreign stock markets we down sharply, how did you feel?
Was therea bit of urgency in your attitude toward your investments? Was there a bit of adrenolin in your blood as you checked your portfolio? Did you finally decide to sell some of those dogs you had been hoping would come back?
Whenever an economic shot is fired across our bow, it makes us nervous. And nerve is an important feature of the stock market. Let’s review the first two weeks of September to see if we can find a clue about when the sell-off will end.
The first week, the TSX dropped about 5%. The market opened higher on the Monday morning, and then dropped another 5% by the close Tuesday. Do you remember how that felt?
Now try to remember how you felt Monday morning, September 15. Was there a bit of panic? Did you feel worse about the market on September 15, or a week earlier, on September 8?
Most of us felt significanlty worse on “Lehman Brothers Day” than a week before when the FED bailed out Fannie Mae and Freddie Mac. We felt worse, but the market did not drop down past its recent low.
This sets up a divergence between market sentiment [our feelings] and market price [the objective reality of the market]. This divergence is bullish. The market is nearer a bottom now than it was last week.
When you woke up this morning and realized that two of America’s biggest brokerage firms were in serious trouble, two of her biggest mortgae companies had to be bailed out last week and foreign stock markets we down sharply, how did you feel?
Was therea bit of urgency in your attitude toward your investments? Was there a bit of adrenolin in your blood as you checked your portfolio? Did you finally decide to sell some of those dogs you had been hoping would come back?
Whenever an economic shot is fired across our bow, it makes us nervous. And nerve is an important feature of the stock market. Let’s review the first two weeks of September to see if we can find a clue about when the sell-off will end.
The first week, the TSX dropped about 5%. The market opened higher on the Monday morning, and then dropped another 5% by the close Tuesday. Do you remember how that felt?
Now try to remember how you felt Monday morning, September 15. Was there a bit of panic? Did you feel worse about the market on September 15, or a week earlier, on September 8?
Most of us felt significanlty worse on “Lehman Brothers Day” than a week before when the FED bailed out Fannie Mae and Freddie Mac. We felt worse, but the market did not drop down past its recent low.
This sets up a divergence between market sentiment [our feelings] and market price [the objective reality of the market]. This divergence is bullish. The market is nearer a bottom now than it was last week.
Tuesday, June 17, 2008
Buzz Cuts
Ain’t it pitiful? The melt down of General Motors seems to have no end. And now, in June 2008, the press is full of stories about plant closings and layoffs. The pitiful part is that the people involved seem totally surprised by the unfolding of GM’s karmic demise.
For years, this observer has been using GM as an example of an obsolete dinosaur. We pointed out that gas guzzling V-eight engines and SUVs have no future in times of high fuel prices [GM Genius, autumn, 06]. We observed that the Japanese manufacturers of small cars are growing as the U.S. manufacturers of large cars are shrinking [The Second Shoe, spring 07]. And now, the seemingly surprised workers at GM’s Oshawa plant are fighting mad because their truck plant is being closed and they are losing their jobs. These Canadian auto workers have become victims of the end of the age of the dinosaurs.
What could the average auto worker have done? Are they really victims? Or have they been careless with their careers?
Hands up, all those who did not notice the following:
The price of gasoline has been going up since 1975. It has been costing us more to fill our tanks for years. This trend favours the manufactures of small cars.
The Canadian dollar has gone up 50% in the past 6 years. CD$ was below 66 cents US in 2002 and it is about $1.00 US now. If a Canadian auto worker was making $24 Canadian per hour in 2002, that was $16 US per hour. Now, if a Canadian auto worker makes $24 CD per hour, that’s $24 US per hour. From the point of view of Americans, Canadian workers received a 50% raise over the last 6 years. Canadian auto workers are the highest paid in the world.
In the last round of labour negotiations, GM’s Mexican and American auto workers gave wage concessions. Canadian workers did not.
GM has been a sick puppy for quite some time. So, why didn’t GM auto workers quietly apply to Honda or Toyota for a job? Why did they stay with the loser for so long? It’s pitiful, isn’t it?
Or is it just human nature to not change? Are we so set in our ways that we won’t change until we are forced to change? Is it our nature to not change until we feel the pain of not changing?
My experience in the investing world, verifies this truth. Most investors will not change their investing ways until they feel financial pain.
Hands up, all those who do not notice the following:
From 2000 to 2002, world stock markets dropped in half. World stock markets bottomed in 2002 [after the 9/11 terrorist attack] and went up for 5 years. A few stock markets are currently at new high levels, but most are a bit below their 2007 levels. Does this seem more like the end of an up trend or the beginning of an up trend? Does this remind you of GM’s failure to notice the ever rising price of gasoline? Is there a time when we should become defensive? Is there a time when we have to change our ways before we feel the pain?
Big banks and stock brokerage firms are the experts at investing, aren’t they? So, how did they manage to get caught in the biggest investment fiasco of this century? [The US junk mortgage situation.] Does this remind you of the problem GM had in continuing to make gas-guzzling 8-cylinder SUVs? Do the big investment firms only know one way of investing? Buy and hold for the long term? And, if they happen to buy the wrong thing, are they stuck with it? Are YOU stuck with it?
Who do you think will make more money in 2008: the car salesman who sells 4-cylinder small cars or the car salesman who sells 8-cylinder SUVs? Who will make more money in 2008: the financial planner who dumps his client’s investments into “buy and hold mutual funds,” or the investment professional whose clients “buy, hold and know when to sell?”
What can the average investor do? Should we follow the example of GM’s Canadian auto workers and wait for the inevitable? Or should we quietly ponder our options and consider changing our ways when we see the hand writing on the wall?
It’s not about cars or investing, is it? It’s about our nature as human beings. It’s hard for us to change our ways. That’s the pitiful part.
For years, this observer has been using GM as an example of an obsolete dinosaur. We pointed out that gas guzzling V-eight engines and SUVs have no future in times of high fuel prices [GM Genius, autumn, 06]. We observed that the Japanese manufacturers of small cars are growing as the U.S. manufacturers of large cars are shrinking [The Second Shoe, spring 07]. And now, the seemingly surprised workers at GM’s Oshawa plant are fighting mad because their truck plant is being closed and they are losing their jobs. These Canadian auto workers have become victims of the end of the age of the dinosaurs.
What could the average auto worker have done? Are they really victims? Or have they been careless with their careers?
Hands up, all those who did not notice the following:
The price of gasoline has been going up since 1975. It has been costing us more to fill our tanks for years. This trend favours the manufactures of small cars.
The Canadian dollar has gone up 50% in the past 6 years. CD$ was below 66 cents US in 2002 and it is about $1.00 US now. If a Canadian auto worker was making $24 Canadian per hour in 2002, that was $16 US per hour. Now, if a Canadian auto worker makes $24 CD per hour, that’s $24 US per hour. From the point of view of Americans, Canadian workers received a 50% raise over the last 6 years. Canadian auto workers are the highest paid in the world.
In the last round of labour negotiations, GM’s Mexican and American auto workers gave wage concessions. Canadian workers did not.
GM has been a sick puppy for quite some time. So, why didn’t GM auto workers quietly apply to Honda or Toyota for a job? Why did they stay with the loser for so long? It’s pitiful, isn’t it?
Or is it just human nature to not change? Are we so set in our ways that we won’t change until we are forced to change? Is it our nature to not change until we feel the pain of not changing?
My experience in the investing world, verifies this truth. Most investors will not change their investing ways until they feel financial pain.
Hands up, all those who do not notice the following:
From 2000 to 2002, world stock markets dropped in half. World stock markets bottomed in 2002 [after the 9/11 terrorist attack] and went up for 5 years. A few stock markets are currently at new high levels, but most are a bit below their 2007 levels. Does this seem more like the end of an up trend or the beginning of an up trend? Does this remind you of GM’s failure to notice the ever rising price of gasoline? Is there a time when we should become defensive? Is there a time when we have to change our ways before we feel the pain?
Big banks and stock brokerage firms are the experts at investing, aren’t they? So, how did they manage to get caught in the biggest investment fiasco of this century? [The US junk mortgage situation.] Does this remind you of the problem GM had in continuing to make gas-guzzling 8-cylinder SUVs? Do the big investment firms only know one way of investing? Buy and hold for the long term? And, if they happen to buy the wrong thing, are they stuck with it? Are YOU stuck with it?
Who do you think will make more money in 2008: the car salesman who sells 4-cylinder small cars or the car salesman who sells 8-cylinder SUVs? Who will make more money in 2008: the financial planner who dumps his client’s investments into “buy and hold mutual funds,” or the investment professional whose clients “buy, hold and know when to sell?”
What can the average investor do? Should we follow the example of GM’s Canadian auto workers and wait for the inevitable? Or should we quietly ponder our options and consider changing our ways when we see the hand writing on the wall?
It’s not about cars or investing, is it? It’s about our nature as human beings. It’s hard for us to change our ways. That’s the pitiful part.
Friday, April 11, 2008
Economising on Research
Economists are cool: Royal Bank’s chief economist has just published an analysis about the possibility of a recession this year.
I am always fascinated by the detail in economic forecasts. Economists REALLY know a lot!
At CastelMoore; we know one or two critical things. #1: The most important bottoms in stock markets occur in recessions. #2: The most important tops occur in economic booms before recessions.
As a technical analyst, for me, today’s most important question is: was the January 2008 stock market selling climax THE low… or is the REAL low yet to come? The RBC economist believes there is no recession in the US – just a ‘soft landing’. Federal Reserve Board Chairman Bernanke seems more sceptical. But both economists are looking for economic strength in the second half of this year. If we believe the RBC report, we would be bullish on the stock market for fundamental/economic reasons. If we believe our own research, we are bullish for technical reasons as well. Either way, our method is working… our clients are currently invested in the stock market. And we will ‘know when to sell,’ when the time comes.
This is where the surprise could come. What if economic weakness in the second quarter is even weaker than they think? [Note: the second quarter is right now!] What if the “soft landing” is not so soft? Will unexpected economic weakness be the surprise news that triggers the next wave of stock market selling? And, more importantly, will the REAL stock market low occur later in the year?
This is where our technical studies help. Technicians don’t have to wait for economic data to be released before we can come to our conclusions. Our technical data is coincident – not lagged, like economic data. We can receive technical a “buy signal” [like the one we got in late January], long before economists have received their economic data. We find that our technical work leads the stock market – and, we all know the stock market leads the economy.
Technical analysis and economic analysis should be used hand-in-hand in the investment business. Technicals lead – economics confirm.
“Buy, hold and know when to sell.”
I am always fascinated by the detail in economic forecasts. Economists REALLY know a lot!
At CastelMoore; we know one or two critical things. #1: The most important bottoms in stock markets occur in recessions. #2: The most important tops occur in economic booms before recessions.
As a technical analyst, for me, today’s most important question is: was the January 2008 stock market selling climax THE low… or is the REAL low yet to come? The RBC economist believes there is no recession in the US – just a ‘soft landing’. Federal Reserve Board Chairman Bernanke seems more sceptical. But both economists are looking for economic strength in the second half of this year. If we believe the RBC report, we would be bullish on the stock market for fundamental/economic reasons. If we believe our own research, we are bullish for technical reasons as well. Either way, our method is working… our clients are currently invested in the stock market. And we will ‘know when to sell,’ when the time comes.
This is where the surprise could come. What if economic weakness in the second quarter is even weaker than they think? [Note: the second quarter is right now!] What if the “soft landing” is not so soft? Will unexpected economic weakness be the surprise news that triggers the next wave of stock market selling? And, more importantly, will the REAL stock market low occur later in the year?
This is where our technical studies help. Technicians don’t have to wait for economic data to be released before we can come to our conclusions. Our technical data is coincident – not lagged, like economic data. We can receive technical a “buy signal” [like the one we got in late January], long before economists have received their economic data. We find that our technical work leads the stock market – and, we all know the stock market leads the economy.
Technical analysis and economic analysis should be used hand-in-hand in the investment business. Technicals lead – economics confirm.
“Buy, hold and know when to sell.”
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